Market failure.
Explanation of Solution
Market failure can be caused by Externality and Market Power. Externality is when one person actions affect the whole economy. Market Power is when a small group of people have a strong impact on the economy.
A public good is one where consumption in non-excludable and non-rival. Private goods are not profitable because of the free rider problem. If any person desires to start out fireworks and put a charge for the event, the chances of making any good revenue would become dim. In the event of fireworks, one cannot restrict the people outside the event from watching the fireworks as it is non-excludable and it is an example of non-rival because fireworks is visible to everyone. Hence, If 1 person has seen the fireworks; it will not decrease the ability of someone else to see the same fireworks. This is the first type of market failure.
The 2nd potential market failure can be explained as the existence of an externality. Externalities happen when the profit gets accumulated to someone else rather than the original buyer or seller. For example, a person might completely internalize the cost that is incurred by smoking cigarettes, which are the price and the health issues that the person has to face; but the same person cannot internalize the harmful health issues that could harm others, who inhale the smoke from the cigarette.
1st case: Yes, it is possible for both to occur if an individual feels that the good has a value, such as fireworks, though they still face free-rider issues. For example, a person would like to start a fireworks event and set a charge to see if the event can be made a better show. But as majorities are free-riding from the person’s display, he would start only a small one. If the fireworks display started by that person causes pollution or harm others, then a negative externality might exist.
2nd case: No, since there is a problem of free-rider organizations that would not be producing any goods. As there are no commodities being produced or consumed, externality factor cannot be considered.
Concept introduction:
Market failure: It is a condition, where free markets fail to distribute resources efficiently.
Public goods: Public goods are the goods that have the characteristics of non-rivalry in nature and non-excludability. One person’s consumption should not reduce the availability for other person. It is not advisable to restrict other people to avail the goods they desire.
Externality: Externality refers to the spill over of benefits or cost to the third party other than the immediate market participants.
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Chapter 4 Solutions
Macroeconomics
- Allocative efficiency WITHIN the health care sector refers to What mix of nonmedical and medical goods and services should be produced in the macro-economy What mix of medical goods and services should be produced in the health economy What specific health care resources should be used to produce the chosen medical goods and services Who should receive the medical goods and services that are producedarrow_forwardProduction efficiency is most concerned with Choice of inputs in production process Quantity of outputs resulting from the production process The technological process of production All of the abovearrow_forwardChoose all of the following that are assumed to be constant while constructing the production possibilities curve Technology Precise mix of inputs Institutional arrangements like judicial protection of business contracts Outputsarrow_forward
- A point that lies OUTSIDE of the PPC can be achieved if A major technological innovation increases production efficiency A sudden influx of resources e.g., massive immigration of trained nurses Economic reform resulting in greater protection of intellectual property rights All of the above Only options 1 and 2arrow_forwardThe marginal benefit from each successive unit of medical care consumed declines BECAUSE each successive unit is more expensive to produce True Falsearrow_forwardIn the Human Capital approach, estimated monetary worth of life is MOST SENSITIVE to which key indicator Discount rate Social security payroll taxes Labour market earnings Workplace injury compensationarrow_forward
- Over the last few decades out-of-pocket costs have formed a DECLINING proportion of total consumer expenditure on medical care True Falsearrow_forwardCost benefit analyses often assumes the following about consumers EXCEPT Consumers have clear preferences among choices they are exposed to Consumers purposely choose actions that result in higher satisfaction Consumers factor in uncertainty of outcomes in their decision-making regarding net benefits and costs Consumers lack information about attributes of market goods that are necessary for ranking their choice setarrow_forwardThe TRUE relationship between MARGINAL utility and an individual’s stock of health can be best described as a scatter plot True Falsearrow_forward
- Many health economists believe that the United States spends its MARGINAL dollars on healthcare in a highly wasteful manner. This view is also known as “flat of the curve” medicine. True Falsearrow_forwardIncreasing provision of out-of-pocket cost calculators by major insurers are attempts to REDUCE price transparency for consumers True Falsearrow_forwardA price hike for medical goods/services that have an inelastic (i.e., <1) own-price elasticity of demand will tend to yield lower revenues True Falsearrow_forward
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